The document discusses IRS collection procedures for different types of business entities that owe payroll tax debt. It explains that sole proprietors and general partners are generally personally liable for a business's unpaid payroll taxes. Corporations provide liability protection unless assets are comingled or officers willfully fail to pay taxes. LLC members have liability protection except for unpaid payroll taxes. The document also discusses trust fund recovery penalties under Code Section 6672 and potential resolution options for taxpayers with payroll tax debt.

1. Collection
Presented by:
Martha De la chaussee
Ex-IRS Collection Officer
IRS Collection by Entity Types

2. IRS Payroll Tax Debt Collection by Entity Type
• Objective:
• 1) Business Entities & Collection
• 2) Internal Revenue Code 6672-who can be
individually assessed for non-payment of payroll taxes.
• 3) Collection Resolution Options

3. Introduction: State Law
• State law is the one who dictates who is shielded from liability and
it is used as a guidance for determining which entity is liable for
taxes incurred by a business.
• State law also defines property and rights to property. The federal
lien to property is dependent on state law.
• State law definition of property is used to determine what
property the federal tax lien attaches to.

4. Business Entity Types
• a. Sole Proprietor
• b. Partnership
• c. Corporation
• d. Limited Liability Companies
• e. Limited Liability Partnership
• f. Non-Profits

5. Sole Proprietorship
• No distinction as to who owns the business. Usually one owner. Although, husband
and wife can own a sole proprietorship.
• Any and all debts of the sole proprietor can be seized and sold by the IRS to collect
unpaid payroll debts of the business.
• For Payroll tax debts all the debt can be collected against any and all assets of the
business and the individual owner (s).
• NOTE: Bankruptcy does not affect payroll tax debt. It survives any discharge.
• Innocent Spouse Claim Potential

6. Partnership
• Created via partnership agreements
• No limit as to the number of partners.
• Partners can be individuals or other entities.
• State law indicates that general partners are responsible for the debts of a general
partnership.
• HOWEVER, the personal debts of the general partners cannot be collected against
the assets of a general partnership.
• Example: Form 1040 Individual Tax Debts cannot be collected against the
partnership business assets.

7. Partnership continued
• IRS can enforce collection against the individual partner (s) ownership interest in a
general partnership for the individual tax liability of the partner.
• Example: Form 1040 Individual Tax Debt can be collected via seizure and sale of
the general partner ownership interest in the general partnership business. Difficult
to sell though at auction.
• Again, when a general partnership owes payroll taxes make sure that the potential
innocent spouse’s property ownership interest is protected from seizure/sale by the
IRS. Especially, in community property states like California.

8. Corporation
• Registered with the Secretary of State and the document specifies the duties
of the Corporate Officers and the right to issue stock.
• Corporation is a legal separate entity and owns property with limited liability
relative to the debts of the owners/stockholders.
• Corporate Assets cannot be enforced upon for the individual debts of the
Officers or stockholders.
• Except, when there are alter-ego/nominee, transferee of property or
comingling of assets between the officers, stockholders and the Corporation.

9. Corporation Cont’d
• Corporate Officers and others maybe exposed individually for non-payment
of payroll taxes if they had financial control of the Corporate assets, were
responsible for paying payroll taxes and willfully failed to pay these taxes.
• More discussion on this issue later under Internal Revenue Code 6672.
• Corporations do not in themselves provide individual protection against
liability when it comes to non-payment of payroll taxes by Corporations.

10. Limited Liability Companies
• An LLC is organized as a distinct legal entity under state law by filing articles of
organization or a similar document with a designated state official.
• An LLC is owned by one or more persons known as members. Members may be
individuals or other legal entities.
• An LLC may own property in its own right and has limitation of liability relative to
the debts of the owner(s).
• Again, IRS cannot enforce collection against members of the LLC for individual
debts of those members. Unless, there is comingling of assets, transferee,
nominee/alter-ego situations.

11. Limited Liability Companies cont’d.
• Limited Liability Companies that elect to be classified as a Corporation are
protected from IRS enforcement actions for debts of the individual members.
• The IRS may levy on the owner's distributive interest in the LLC, levy on the
owner's membership interest in the LLC and sell it, or file suit to foreclose the
federal tax lien against the ownership interest.
• However, payroll tax debts can be collected against all the equity in assets of the
LLC and payroll tax debts can be collected from those who are responsible and who
willfully failed to pay the LLC payroll debts.

12. Limited Liability Company Partnership
• If a company elects to be a limited liability partnership and is taxed as a partnership.
• Under the provisions of Treas. Reg. 301.7701-3, an LLC is classified as a
partnership if it has two or more members or disregarded as an entity separate from
its owner, if it has a single owner.
• State LLC law specifically limits the liability of owners for debts of the LLC.
• Again, not for unpaid payroll tax debts. Members or partners of an LLC
Partnership can be held personally liable for unpaid payroll taxes of the
LLC.

13. Single Member LLC
• Single-member LLCs are generally disregarded as taxable entities, meaning that
the owner is the taxpayer. Think sole proprietor.
• Payroll Tax Debts: For wages paid prior to January 1, 2009, the employment tax
liability of the single-member owner of a disregarded LLC may be reported in the
name of the LLC.
• However, the individual owner of the disregarded LLC is still the liable taxpayer for
any employment tax liability incurred before January 1, 2009, regardless of whether
the LLC's name and EIN were used to report the liability.

14. Single Member LLC cont’d
• For wages paid on or after January 1, 2009, employment taxes will be the
liability of the single-member LLC. In other words, the single-member
LLC is not disregarded for employment tax purposes.
• Depending on the facts and circumstances, a member of an LLC may be
responsible for the trust fund recovery penalty under IRC 6672.
• See IRM 5.1.21, Collecting from Limited Liability Companies, for additional
information.

15. . Limited Liability Partnerships (LLPs)
• Are formed under a state limited liability partnership law.
• Generally, a partner in an LLP is not liable for the debts of the LLP or any
other partner.
• A partner is not liable for the acts or omissions of any other partner, solely
by reason of being a partner.
• Depending on the facts and circumstances, a member of an LLP may be
responsible for the trust fund recovery penalty under IRC 6672. Refer to
IRM 5.17.7.1.1.3, Partners/Members.

16. Non-Profits
• The organization must not be organized or operated for the benefit of private
interests.
• No part of a section 501(c)(3) organization's net earnings be for the, benefit of any
private shareholder or individual. If the organization engages in an excess benefit
transaction with a person having substantial influence over the organization, an
excise tax may be imposed on the person and any organization managers agreeing
to the transaction.
• Furthermore, directors, volunteers, and others who have the responsibility of the
financial affairs of the non-profit maybe investigated and held liable for non-
payment of payroll taxes.

17. Note: Non-Profit Organizations
• Persons serving as volunteers solely in an honorary capacity as directors and
trustees of tax exempt organizations will generally not be considered
responsible persons.
• Unless they participated in the day-to-day or financial operations of
the organization and had actual knowledge of the failure to withhold
or pay over the trust fund taxes.
• This does not apply if it would result in there being no person
responsible for the TFRP. Refer to IRC 6672(e).

18. Internal Revenue Code 6672
• Imposes personal liability in the amount of the unpaid trust fund taxes upon
any person who is required to collect, account for, and pay over such taxes
and who willfully fails to do so.
• IRS has to prove that an entity or individual were responsible and willfully
failed to pay the payroll taxes.
• Potential responsible persons include: Officers, employees, directors,
partners, shareholders, Payroll Service Providers, Payroll Employer
Organization (PEO), Reporting Agents, entities and others.

19. IRC 6672 Establishing Willfullness
Internal Revenue Manual 5.7.3.3.2
• IRS is required to prove intentional, reckless, knowing, awareness, intentional
disregard and or indifferent to the requirements for paying payroll taxes.
• A responsible person’s failure to investigate or correct mismanagement after
being notified that tax withholding taxes are due and not paid satisfies the
willfulness requirement.
• Anyone loaning money to a company specifically to pay payroll tax debts and
the company fails to do so can be held personally liable under IRC 6672.

20. Liability When Funds are Supplied — IRC
§ 3505(b)
• IRC § 3505(b) provides that a lender, surety, or other person who supplies funds to
or for the account of an employer for the specific purpose of paying wages of the
employees of such employer may be personally liable for any unpaid withholding
taxes even though this person does not directly pay the employees’ wages.
• A person within the meaning of Section 3505(b) includes the following: A prime or
general contractor who supplies funds directly to a subcontractor to meet its net
payroll with knowledge of the subcontractor’s inability to pay its withholding taxes.
United States. Algernon Blair, Inc., 441 F.2d 1379 (5th Cir. 1971).
•

21. Liability When Funds are Supplied — IRC
§ 3505(b) Continued.
• A shareholder, including a parent company of a subsidiary, who makes a
capital contribution or a direct loan, or who puts up collateral for a loan
from a third party to a corporation if the loan is to be used by the
corporation to pay net wages. United States v. Intercontinental Industries,
Inc., 635 F.2d 1215 (6th Cir. 1980).
• A bank that honors a customer’s/employer’s overdrafts for payroll checks.
Fidelity Bank, N.A. v. United States, 616 F.2d 1181 (10th Cir. 1980).

22. Potential Appeal of IRC 6672
• Where willfulness and responsibility are not proved by the IRS facts and
evidence in the trust fund recovery penalty file.
• Type of payroll tax assessments can in themselves be unprovable for the IRS
to establish willfulness:

23. Type of Payroll Tax Assessments (Debts)
If Then
The assessment is a Combined Annual Wage Reporting
(CAWR) assessment
It is normally difficult to establish willfulness to the degree
necessary to assert the TFRP (See IRM 5.7.3.3.2(5) for
situations where the TFRP should be pursued).
An employment tax assessment is made under IRC 3509 It requires a determination of intentional disregard of the
requirements to deduct and withhold taxes (See IRM
5.7.3.3.2(6)).
The assessment involves a volunteer director or trustee of
a tax exempt organization
The IRS may need to show the person's "actual knowledge" of
the organization's failure to collect or pay over trust fund taxes,
if the person was serving as a volunteer solely in an honorary
capacity (IRC 6672(e)).

24. Collection Resolution Options:
• There are over twenty-six different processes and procedures that one can
utilize to resolve client tax debt issues.
• Many notices and letters need to be issued by the IRS prior to taking
enforcement actions such as filing liens, issuing levies and seizure and sale of
assets.
• Appeal Rights should be requested timely and according to the type of case
issues being addressed.
• Do not forget innocent spouse claims.

25. Collection Resolution Options
• Audit Reconsideration
• File Original Tax Return
• File Amended Tax Return
• Abatement of Penalty
• Hardship
• Installment Agreement
• Offer in Compromise
• Collateral Agreement

26. Collection Resolution Options
• Post of a Bond
• Payroll Deduction
• Wage Garnishment at 25% maybe less than an installment agreement.
• Bankruptcy
• Close Business and stop pyramiding of payroll taxes. Resolve according to
entity type.
• Lien Discharge, subordination, withdrawal, non-attachment, release.

27. Collection Resolution Options
• Collection Due Process Appeal and potential tax court.
• Tax Court Filing for decision on issues.
• Sell assets of client to pay debts. Ex. Installment Agreement for one year and
balloon payment from sale of assets. Or, withdrawal of bank accounts, 401(k), sell
real or other personal property.
• File suit against the U.S. Government (IRS) for erroneous levy.
• Refund claims
• Credit transfers

28. Collection Resolution Options
• Tax Preparer Fraud Claim with separate request for penalty abatement.
• Identity Theft claim
• File a Congressional Letter with complaints against IRS.
• Form 911 Request for Taxpayer Advocate Assistance
• Request for Appeal accordingly. Look out for appeal rights on all letters and
procedures conducted by IRS Collection.
• Factoring of Accounts Receivable, loans, reverse mortgages, pension loans.

29. Collection Resolution Options
• Think out of the box according to taxpayer assets and ability to pay or not.
• Innocent Spouse, Equitable Relief, Separation of Liability.
• Secure personal loans and designate payment on check to TRUST FUND
ONLY.

30. Conclusion
• There are many ways for IRS Collection to take place. Depending on the
type of entity that is in payroll tax debt will the collection processes and
procedures determine the ability to collect.
• Who is responsible for non-payment will be determined if Automated
Collection System fails to get to assets via levies, liens and other actions.
• Personal liability for unpaid payroll taxes will create personal financial havoc
on those entities or individuals who are confronted with this type of
assessments.

31. Conclusion
• Do read the Internal Revenue Manual Part 5 to go over current processes and
procedures that Collection should follow. Many new Revenue Officers who are
making many mistakes in making sure taxpayer rights are provided for and followed.
• Field Collection Revenue Officers are the ones who you will be confronted with to
negotiate the best resolution option according to client’s entity type, cause of
liability, compliance and cross compliance, determine which resolution options
mentioned will resolve the debt.
• Do not be intimidated by Group Managers or the Revenue Officers. It is there job
to inform you of collection actions to follow if you and client fail to comply with
their requests.

32. Conclusion.
• However, just because they ask for something it does not mean it is in the
best interest of your client.
• Innocent Spouse Claims
• Appeals
• Think outside the box and look into all the other tax resolution options that
can benefit the taxpayer.

33. Contact Information
• Martha De la chaussee
• (323) 344-2294
• atggroup1@yahoo.com